Consider an economy where the marginal propensity to consume is 0.8 and the marginal propensity to import is 0.1. If the government increases the income tax rate from 10% to 20%, the aggregate demand curve (plotted with aggregate demand on the vertical axis and national income on the horizontal axis) will become steeper.
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An economy's aggregate demand curve is plotted with total spending on the vertical axis and national income on the horizontal axis. Its slope is determined by how much of an additional dollar of national income is spent on that economy's domestic goods and services. Consider two distinct economies:
- Economy A: The marginal propensity to consume is 0.9, the income tax rate is 20%, and the marginal propensity to import is 0.1.
- Economy B: The marginal propensity to consume is 0.7, the income tax rate is 20%, and the marginal propensity to import is 0.3.
Which statement correctly analyzes the relationship between their aggregate demand curves?
Policy Impact on Aggregate Demand Slope
Evaluating Policy Options
Consider an economy where the marginal propensity to consume is 0.8 and the marginal propensity to import is 0.1. If the government increases the income tax rate from 10% to 20%, the aggregate demand curve (plotted with aggregate demand on the vertical axis and national income on the horizontal axis) will become steeper.